**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

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**FORM 10-Q**

| **(Mark One)**                                                                                                                        |
|---------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                  |   |
| **x**                                                                                                                                 | **Quarterly Report Pursuant to Section 13 or 15(d)  of the Securities Exchange Act of 1934** |
|                                                                                                                                  |   |
| **For the quarterly period ended March 31, 2007**                                                                                     |
| ** **                                                                                                                            |
| **or**                                                                                                                                |
| ** **                                                                                                                            |
| **o**                                                                                                                                 | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
|                                                                                                                                  |   |
| **For the transition period from                 to** |

 

**Commission file number 1-16017**

**ORIENT-EXPRESSHOTELS LTD.**

(Exact name of registrant asspecified in its charter)

 

| **Bermuda**                                                | ** ** | **98-0223493**       |
|------------------------------------------------------------|------------|----------------------|
| (State or other  jurisdiction                              |       | (I.R.S. Employer     |
| of incorporation  or                                       |       | Identification  No.) |
| organization)                                              |       |                 |
|                                                       |       |                 |
| **22  Victoria Street**                                    | ** ** | ** **           |
| **P.O.  Box HM 1179**                                      | ** ** | ** **           |
| **Hamilton  HMEX, Bermuda**                                | ** ** | ** **           |
| (Address of  principal executive offices)                  |       | (Zip Code)           |
|                                                       |       |                 |
| **441–295–2244**                                 |
| (Registrant’s  telephone number, including area code) |

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.    Yes x   No o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated file, or a non-accelerated file. (See definition of “accelerated filer and large accelerated file” inRule 12b-2 of the Exchange Act).

LargeAccelerated File  xAccelerated Filer  o  Non-AcceleratedFiler   ̈

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).   Yes o   No x

As of April 30,2007, 42,391,500 Class A common shares and 18,044,478 Class B common shares ofOrient-Express Hotels Ltd. were outstanding. All of the Class B shares areowned by a subsidiary of Orient-Express Hotels Ltd.

 

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**PART I – FINANCIAL INFORMATION**

**ITEM1.   Financial Statements**

**Orient-ExpressHotels Ltd. and Subsidiaries**

**CondensedConsolidated Balance Sheets (unaudited)**

 
| ** **                                                                               | ** ** | **March 31,  2007**             | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                                                                               | ** ** | **(Dollars in thousands)** | ** ** |
| ** **                                                                               | ** ** | ** **                           | ** ** |
| **Assets**                                                                               | ** ** | ** **                           | ** ** |
| Cash and cash equivalents                                                                |       | $                                    | 59,473     |                        | $          | 79,318 |   |
| Accounts receivable,  net of allowances of $1,327 and $1,299                             |       | 76,203                               |       | 74,327                      |       |
| Due from related  parties                                                                |       | 20,741                               |       | 19,939                      |       |
| Prepaid expenses and  other                                                              |       | 15,929                               |       | 9,485                       |       |
| Inventories                                                                              |       | 39,003                               |       | 35,789                      |       |
| Real estate assets                                                                       |       | 39,696                               |       | 35,821                      |       |
| Total current assets                                                                     |       | 251,045                              |       | 254,679                     |       |
|                                                                                     |       |                                 |       |                        |       |
| Property, plant and  equipment, net of accumulated depreciation of $218,167 and $211,136 |       | 1,204,357                            |       | 1,183,400                   |       |
| Investments                                                                              |       | 131,916                              |       | 130,124                     |       |
| Goodwill                                                                                 |       | 122,143                              |       | 121,651                     |       |
| Other intangible assets                                                                  |       | 20,390                               |       | 20,149                      |       |
| Other assets                                                                             |       | 44,575                               |       | 41,660                      |       |
|                                                                                     |       | $                                    | 1,774,426  |                        | $          | 1,751,663 |   |
| **Liabilities and Shareholders’  Equity**                                           |       |                                 |       |                        |       |
| Working capital  facilities                                                              |       | $                                    | 66,590     |                        | $          | 46,590 |   |
| Accounts payable                                                                         |       | 25,449                               |       | 26,227                      |       |
| Due to related parties                                                                   |       | 1,580                                |       | 1,249                       |       |
| Accrued liabilities                                                                      |       | 53,195                               |       | 55,916                      |       |
| Deferred revenue                                                                         |       | 36,214                               |       | 25,501                      |       |
| Current portion of long-term  debt and capital leases                                    |       | 82,028                               |       | 83,397                      |       |
| Total current  liabilities                                                               |       | 265,056                              |       | 238,880                     |       |
|                                                                                     |       |                                 |       |                        |       |
| Long-term debt and  obligations under capital leases                                     |       | 585,861                              |       | 586,300                     |       |
| Liability for pension  benefit                                                           |       | 8,677                                |       | 8,677                       |       |
| Other liabilities                                                                        |       | 2,330                                |       | 2,330                       |       |
| Deferred income taxes                                                                    |       | 105,367                              |       | 106,598                     |       |
| Liability for uncertain  tax positions                                                   |       | 29,301                               |       | —                      |       |
|                                                                                     |       | 996,592                              |       | 942,785                     |       |
| Commitments and  contingencies                                                           |       | —                               |       | —                      |       |
| Minority interest                                                                        |       | 1,702                                |       | 1,882                       |       |
|                                                                                     |       |                                 |       |                        |       |
| Shareholders’ equity:                                                               |       |                                 |       |                        |       |
| Preferred shares  $0.01 par value (30,000,000 shares authorized, issued nil)             |       | —                               |       | —                      |       |
| Class A common  shares $0.01 par value (120,000,000 shares authorized):                  |       |                                 |       |                        |       |
| Issued - 42,313,600  (2006 - 42,196,350)                                                 |       | 423                                  |       | 422                         |       |
| Class B common  shares $0.01 par value (120,000,000 shares authorized):                  |       |                                 |       |                        |       |
| Issued - 18,044,478  (2006 - 18,044,478)                                                 |       | 181                                  |       | 181                         |       |
| Additional paid-in  capital                                                              |       | 511,902                              |       | 509,762                     |       |
| Retained earnings                                                                        |       | 268,228                              |       | 301,785                     |       |
| Accumulated other  comprehensive loss                                                    |       | (4,421                               | )          | (4,973                      | )          |
| Less: reduction due to  class B common shares owned by a subsidiary - 18,044,478         |       | (181                                 | )          | (181                        | )          |
| Total shareholders’  equity                                                         |       | 776,132                              |       | 806,996                     |       |
|                                                                                     |       | $                                    | 1,774,426  |                        | $          | 1,751,663 |   |

 

See notes to condensedconsolidated financial statements.

2

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**Orient-ExpressHotels Ltd. and Subsidiaries**

**Statementsof Condensed Consolidated Operations (unaudited)**
| **Three months ended March 31,**                   | ** ** | **2007**                                                                           | ** ** | **2006  (restated)** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                             | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
| ** **                                                             | ** ** | ** **                                                                         | ** ** | ** **           | ** ** |
| Revenue                                                                |       | $                                                                                  | 95,926     |                 | $          | 79,251 |   |
|                                                                   |       |                                                                               |       |                 |       |
| Expenses:                                                              |       |                                                                               |       |                 |       |
| Depreciation and amortization                                          |       | 9,068                                                                              |       | 8,606                |       |
| Operating                                                              |       | 49,394                                                                             |       | 40,729               |       |
| Selling, general and administrative                                    |       | 35,717                                                                             |       | 32,229               |       |
| Total expenses                                                         |       | 94,179                                                                             |       | 81,564               |       |
|                                                                   |       |                                                                               |       |                 |       |
| Earnings/(losses)  from operations before net finance costs            |       | 1,747                                                                              |       | (2,313               | )          |
|                                                                   |       |                                                                               |       |                 |       |
| Interest  expense, net                                                 |       | (10,561                                                                            | )          | (9,770               | )          |
| Foreign  currency, net                                                 |       | 102                                                                                |       | 682                  |       |
| Net finance  costs                                                     |       | (10,459                                                                            | )          | (9,088               | )          |
|                                                                   |       |                                                                               |       |                 |       |
| Losses before  income taxes and earnings from unconsolidated companies |       | (8,712                                                                             | )          | (11,401              | )          |
|                                                                   |       |                                                                               |       |                 |       |
| Benefit from  income taxes                                             |       | 2,728                                                                              |       | 2,174                |       |
|                                                                   |       |                                                                               |       |                 |       |
| Losses before  earnings from unconsolidated companies                  |       | (5,984                                                                             | )          | (9,227               | )          |
|                                                                   |       |                                                                               |       |                 |       |
| Earnings from  unconsolidated companies, net of tax                    |       | 2,303                                                                              |       | 1,826                |       |
|                                                                   |       |                                                                               |       |                 |       |
| Net losses                                                             |       | $                                                                                  | (3,681     | )                    | $          | (7,401 | ) |
|                                                                   |       |                                                                               |       |                 |       |
| Net losses per  share:                                                 |       |                                                                               |       |                 |       |
| Basic and diluted                                                      |       | $                                                                                  | (0.09      | )                    | $          | (0.19 | ) |
|                                                                   |       |                                                                               |       |                 |       |
| Dividends per  share                                                   |       | $                                                                                  | 0.025      |                 | $          | 0.025 |   |

 

See notes tocondensed consolidated financial statements.

3

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**Orient-ExpressHotels Ltd. and Subsidiaries**

**Statements of CondensedConsolidated Cash Flows (unaudited)**
| **Three months  ended March 31,**                                                  | ** ** | **2007**                             | ** ** | **2006  (restated)** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------------------|------------|
| ** **                                                                         | ** ** | **(Dollars in thousands)** | ** ** |
| Cash flows from  operating activities:                                             |       |                                 |       |                 |       |
| Net losses                                                                         |       | $                                    | (3,681     | )                    | $          | (7,401 | ) |
| Adjustments to reconcile net losses to net cash used  in operating activities:     |       |                                 |       |                 |       |
| Depreciation and amortization                                                      |       | 9,068                                |       | 8,598                |       |
| Amortization and write-off of finance costs                                        |       | 718                                  |       | 786                  |       |
| Undistributed (earnings)/losses of affiliates                                      |       | (694                                 | )          | 516                  |       |
| Stock-based compensation                                                           |       | 372                                  |       | 215                  |       |
| Change in deferred tax                                                             |       | (5,143                               | )          | (4,444               | )          |
| Losses from disposals of fixed assets                                              |       | 114                                  |       | —               |       |
| Other non-cash items                                                               |       | 965                                  |       | (688                 | )          |
| Change in assets and liabilities net of effects from  acquisition of subsidiaries: |       |                                 |       |                 |       |
| Increase in receivables, prepaid expenses and other                                |       | (9,605                               | )          | (3,089               | )          |
| Increase in inventories                                                            |       | (2,039                               | )          | (1,466               | )          |
| Increase in real estate assets held for sale                                       |       | (3,875                               | )          | (6,672               | )          |
| Increase in payables, accrued liabilities and  deferred revenue                    |       | 11,203                               |       | 12,390               |       |
|                                                                               |       |                                 |       |                 |       |
| Total adjustments                                                                  |       | 1,084                                |       | 6,146                |       |
|                                                                               |       |                                 |       |                 |       |
| Net cash used in  operating activities                                             |       | (2,597                               | )          | (1,255               | )          |
|                                                                               |       |                                 |       |                 |       |
| Cash flows from  investing activities:                                             |       |                                 |       |                 |       |
| Capital expenditures                                                               |       | (27,153                              | )          | (21,308              | )          |
| Acquisitions and investments, net of cash acquired                                 |       | (4,466                               | )          | (9,456               | )          |
| Proceeds from sale of fixed assets                                                 |       | 405                                  |       | —               |       |
|                                                                               |       |                                 |       |                 |       |
| Net cash used in  investing activities                                             |       | (31,214                              | )          | (30,764              | )          |
|                                                                               |       |                                 |       |                 |       |
| Cash flows from  financing activities:                                             |       |                                 |       |                 |       |
| Net proceeds from working capital facilities and  redrawable loans                 |       | 19,581                               |       | 8,703                |       |
| Stock options exercised                                                            |       | 1,769                                |       | 237                  |       |
| Issuance of long-term debt                                                         |       | 123                                  |       | 42,296               |       |
| Principal payments under long-term debt                                            |       | (6,530                               | )          | (17,402              | )          |
| Payment of common share dividends                                                  |       | (1,056                               | )          | (985                 | )          |
|                                                                               |       |                                 |       |                 |       |
| Net cash  provided by financing activities                                         |       | 13,887                               |       | 32,849               |       |
|                                                                               |       |                                 |       |                 |       |
| Effect of  exchange rate changes on cash and cash equivalents                      |       | 79                                   |       | (30                  | )          |
|                                                                               |       |                                 |       |                 |       |
| Net  (decrease)/increase in cash and cash equivalents                              |       | (19,845                              | )          | 860                  |       |
|                                                                               |       |                                 |       |                 |       |
| Cash and cash  equivalents at beginning of period                                  |       | 79,318                               |       | 38,397               |       |
|                                                                               |       |                                 |       |                 |       |
| Cash and cash  equivalents at end of period                                        |       | $                                    | 59,473     |                 | $          | 39,257 |   |

 

See notesto condensed consolidated financial statements.

4

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**Orient-Express Hotels Ltd. andSubsidiaries**

**Statements of CondensedConsolidated Shareholders’ Equity (unaudited)**

 
| **(Dollars in thousands)** | ** ** | **Preferred  Shares  At Par  Value** | ** ** | ** Class A   Common   Shares   at Par  Value** | ** ** | **Class B   Common   Shares   at Par   Value** | ** ** | **Additional  Paid-In  Capital** | ** ** | ** Retained   Earnings  (restated)** | ** ** | ** Accumulated  Other  Comprehensive  Loss** | ** ** | **Common  Shares   Owned by  Subsidiary** | ** ** | **Total  Comprehensive   Income/(Loss)  (restated)** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|----------------------------------|------------|------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------------|------------|
|                                 |       |                                      |       |                                                                         |       |                                                                         |       |                             |       |                                           |       |                                              |       |                                                |       |                                                      |       |
| Balance, January  1, 2006            |       | $                                         | —     |                                                                         | $          | 393                                                                          |       | $                                | 181        |                                           | $          | 404,923                                           |       | $                                                   | 266,093    |                                                      | $          | (46,123 | ) | $ | (181 | ) |   |   |
| Stock-based  compensation            |       | —                                    |       | —                                                                       |       | —                                                                       |       | 215                              |       | —                                         |       | —                                            |       | —                                              |       |                                                      |       |
| Stock options  exercised             |       | —                                    |       | —                                                                       |       | —                                                                       |       | 237                              |       | —                                         |       | —                                            |       | —                                              |       |                                                      |       |
| Dividends on  common shares          |       | —                                    |       | —                                                                       |       | —                                                                       |       | —                           |       | (985                                           | )          | —                                            |       | —                                              |       |                                                      |       |
| Comprehensive  loss:                 |       |                                      |       |                                                                         |       |                                                                         |       |                             |       |                                           |       |                                              |       |                                                |       |                                                      |       |
| Net losses                           |       | —                                    |       | —                                                                       |       | —                                                                       |       | —                           |       | (7,401                                         | )          | —                                            |       | —                                              |       | $                                                         | (7,401     | ) |
| Other comprehensive income           |       | —                                    |       | —                                                                       |       | —                                                                       |       | —                           |       | —                                         |       | 1,106                                             |       | —                                              |       | 1,106                                                     |       |
|                                 |       |                                      |       |                                                                         |       |                                                                         |       |                             |       |                                           |       |                                              |       |                                                |       | $                                                         | (6,295     | ) |
| Balance, March  31, 2006             |       | $                                         | —     |                                                                         | $          | 393                                                                          |       | $                                | 181        |                                           | $          | 405,375                                           |       | $                                                   | 257,707    |                                                      | $          | (45,017 | ) | $ | (181 | ) |   |   |
|                                 |       |                                      |       |                                                                         |       |                                                                         |       |                             |       |                                           |       |                                              |       |                                                |       |                                                      |       |
| Balance, January  1, 2007            |       | $                                         | —     |                                                                         | $          | 422                                                                          |       | $                                | 181        |                                           | $          | 509,762                                           |       | $                                                   | 301,785    |                                                      | $          | (4,973 | ) | $ | (181 | ) |   |   |
| FIN48 liabilities                    |       |                                      |       |                                                                         |       |                                                                         |       |                             |       | (28,820                                        | )          |                                              |       |                                                |       |                                                      |       |
| Stock-based  compensation            |       | —                                    |       | —                                                                       |       | —                                                                       |       | 372                              |       | —                                         |       | —                                            |       | —                                              |       |                                                      |       |
| Stock options  exercised             |       | —                                    |       | 1                                                                            |       | —                                                                       |       | 1,768                            |       | —                                         |       | —                                            |       | —                                              |       |                                                      |       |
| Dividends on  common shares          |       | —                                    |       | —                                                                       |       | —                                                                       |       | —                           |       | (1,056                                         | )          | —                                            |       | —                                              |       |                                                      |       |
| Comprehensive  loss:                 |       |                                      |       |                                                                         |       |                                                                         |       |                             |       |                                           |       |                                              |       |                                                |       |                                                      |       |
| Net losses                           |       | —                                    |       | —                                                                       |       | —                                                                       |       | —                           |       | (3,681                                         | )          | —                                            |       | —                                              |       | $                                                         | (3,681     | ) |
| Other comprehensive income           |       | —                                    |       | —                                                                       |       | —                                                                       |       | —                           |       | —                                         |       | 552                                               |       | —                                              |       | 552                                                       |       |
|                                 |       |                                      |       |                                                                         |       |                                                                         |       |                             |       |                                           |       |                                              |       |                                                |       | $                                                         | (3,129     | ) |
| Balance, March  31, 2007             |       | $                                         | —     |                                                                         | $          | 423                                                                          |       | $                                | 181        |                                           | $          | 511,902                                           |       | $                                                   | 268,228    |                                                      | $          | (4,421 | ) | $ | (181 | ) |   |   |

 

See notes tocondensed consolidated financial statements.

 

5

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**Orient-Express Hotels Ltd. and Subsidiaries**

**Notes to Condensed Consolidated FinancialStatements**

 

**1.****                                      Basisof financial statement presentation**

In this reportOrient-Express Hotels Ltd. is referred to as the “Company”, and the Company andits subsidiaries are referred to collectively as “OEH”.

*(a)*                               *Accounting policies*

The accompanying condensedconsolidated financial statements have been prepared pursuant to the rules andregulations of the U.S. Securities and Exchange Commission for reporting on Form10-Q. Accordingly, they do not include all of the information and footnotesrequired by U.S. generally accepted accounting principles for completefinancial statements. In the opinion of the management of the Company, alladjustments (consisting of normal recurring adjustments) necessary for a fairpresentation of financial position, operating results and cash flows have beenincluded in the statements. Interim results are not necessarily indicative ofresults that may be expected for the year ended December 31, 2007. Thesefinancial statements should be read in conjunction with the consolidatedfinancial statements and footnotes thereto included in the Company’s periodicfilings with the Commission, including the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2006. See Note 1 to the consolidated financialstatements in the 2006 Form 10-K for additional information regardingsignificant accounting policies.

The accountingpolicies used in preparing these financial statements are the same as thoseapplied in the prior year, except that the Company adopted Financial AccountingStandards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes”, as of January 1, 2007, which is discussed in Note 9.

*(b)**                               Netlosses per share*

The number of shares used in computing basic and diluted losses pershare was as follows (in thousands):
| **Three months  ended March 31,** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |
| Basic                             |       | 42,256   |       | 39,413   |       |
| Effect of dilution                |       | —   |       | —   |       |
| Diluted                           |       | 42,256   |       | 39,413   |       |

 

For the threemonths ended March 31, 2007 and 2006, the anti-dilutive effect of stock optionson 278,604 and 401,970 class A common shares, respectively, was excluded fromthe computation of diluted losses per share.

6

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*(c)           Dividends*

On January 5, 2007, theCompany declared a dividend of $0.025 per common share payable February 5, 2007to shareholders of record January 19, 2007.

*(d)          Earnings from unconsolidated companies*

Earnings fromunconsolidated companies include OEH’s share of the net earnings of its equityinvestments as well as interest income related to loans and advances to theequity investees amounting to $2,794,000 and $2,342,000 for the three monthsended March 31, 2007 and 2006, respectively.

*(e)           Restatement*

As reported in the 2006Form 10-K, subsequent to the issuance of the Company’s March 31, 2006 financialstatements on Form 10-Q, the Company’s management determined that certaindeferred tax liabilities, arising principally on the fair value adjustmentsmade on the acquisition of subsidiaries between 1976 and 2002 as well as onother temporary differences in respect of land and buildings, were notrecorded. As a result, the benefit from income taxes for the three months endedMarch 31, 2006 was understated by $210,000, arising from the release of thedeferred tax provision as the properties are depreciated. The restatementadjustment did not impact OEH’s statement of condensed consolidated cash flows,except for reducing the net loss and increasing the change in deferred tax by$210,000. Also $778,000 of finance costs were reclassified from depreciation tointerest expense.

The following tablepresents the impact of the restatement adjustment on OEH’s statement ofcondensed consolidated operations for the period ended March 31, 2006 (dollarsin thousands, except per share amounts):

7

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| ** **                                                             | ** ** | **As   previously   reported** | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------|------------|--------------|------------|
| ** **                                                             | ** ** | ** **                               | ** ** | ** **      | ** ** | ** **   | ** ** |
| Revenue                                                                |       | $                                        | 79,251     |            | $          | —       |       | $ | 79,251 |   |
|                                                                   |       |                                     |       |            |       |         |       |
| Expenses                                                               |       |                                     |       |            |       |         |       |
| Depreciation and amortization                                          |       | 9,384                                    |       | (778            | )          | 8,606        |       |
| Operating                                                              |       | 40,729                                   |       | —          |       | 40,729       |       |
| Selling, general and administrative                                    |       | 32,229                                   |       | —          |       | 32,229       |       |
| Total expenses                                                         |       | 82,342                                   |       | (778            | )          | 81,564       |       |
|                                                                   |       |                                     |       |            |       |         |       |
| Losses from  operations before net finance costs                       |       | (3,091                                   | )          | 778             |       | (2,313       | )          |
|                                                                   |       |                                     |       |            |       |         |       |
| Interest  expense, net                                                 |       | (8,992                                   | )          | (778            | )          | (9,770       | )          |
| Foreign  currency, net                                                 |       | 682                                      |       | —          |       | 682          |       |
| Net finance  costs                                                     |       | (8,310                                   | )          | (778            | )          | (9,088       | )          |
| Losses before  income taxes and earnings from unconsolidated companies |       | (11,401                                  | )          | —          |       | (11,401      | )          |
|                                                                   |       |                                     |       |            |       |         |       |
| Benefit from  income taxes                                             |       | 1,964                                    |       | 210             |       | 2,174        |       |
|                                                                   |       |                                     |       |            |       |         |       |
| Losses before  earnings from unconsolidated companies                  |       | (9,437                                   | )          | —          |       | (9,437       | )          |
|                                                                   |       |                                     |       |            |       |         |       |
| Earnings from  unconsolidated companies, net of tax                    |       | 1,826                                    |       | —          |       | 1,826        |       |
|                                                                   |       |                                     |       |            |       |         |       |
| Net losses                                                             |       | $                                        | (7,611     | )               | $          | 210          |       | $ | (7,401 | ) |
|                                                                   |       |                                     |       |            |       |         |       |
| Net losses per  share:                                                 |       |                                     |       |            |       |         |       |
| Basic                                                                  |       | $                                        | (0.19      | )               | $          | 0.00         |       | $ | (0.19 | ) |
| Diluted                                                                |       | $                                        | (0.19      | )               | $          | 0.00         |       | $ | (0.19 | ) |

 

**2.             Acquisitions**

*La Résidence Phou Vao minority interests acquisition*

Effective March 10, 2007, OEH purchased an additional18% interest in La Résidence Phou Vao**in LuangPrabang, Laos for a cash consideration of $376,000 bringing its interest to69%. A deferred tax liability of $83,000 has been recorded on the acquisitionarising mainly on the fair value adjustment to assets of $236,000. Goodwill hasbeen reduced by $52,000 due to elimination of minority interest losses broughtforward recorded in the goodwill on the original acquisition of the Panseahotels group in Asia.

8

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*Final retention payment relating to Grand HotelEurope acquisition*

In March 2007, a final retention payment of $2,850,000plus accrued interest of $218,000 has been made in accordance with the originalagreement for the acquisition of Grand Hotel Europe in St. Petersburg completedin February 2005.

**3.             Investments**

Summarized financial datafor OEH’s unconsolidated companies for the periods during which the investmentswere held by OEH are as follows (dollars in thousands):
| ** **                                       | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                       |       |                     |       |                        |       |
| Current assets                                   |       | $                        | 46,876     |                        | $          | 50,782 |   |
| Property, plant  and equipment, net              |       | 346,937                  |       | 347,772                     |       |
| Other assets                                     |       | 46,302                   |       | 46,022                      |       |
| Total assets                                     |       | $                        | 440,115    |                        | $          | 444,576 |   |
|                                             |       |                     |       |                        |       |
| Current  liabilities                             |       | $                        | 45,407     |                        | $          | 59,621 |   |
| Long-term debt                                   |       | 236,550                  |       | 224,477                     |       |
| Other  liabilities                               |       | 88,764                   |       | 86,637                      |       |
| Total  shareholders’ equity                 |       | 69,394                   |       | 70,841                      |       |
| Total  liabilities and shareholders’ equity |       | $                        | 440,115    |                        | $          | 444,576 |   |

 
| **Three months ended March 31,**                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
|                                               |       |     |       |     |       |
| Revenue                                            |       | $        | 41,837     |     | $          | 37,058 |   |
| Earnings from  operations before net finance costs |       | $        | 6,725      |     | $          | 3,928 |   |
| Net losses                                         |       | $        | (514       | )        | $          | (3,138 | ) |

 

9

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**4.             Property, plant and equipment**

The major classesof property, plant and equipment are as follows (dollars in thousands):
| ** **                               | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                               |       |                     |       |                        |       |
| Land and  buildings                      |       | $                        | 1,016,631  |                        | $          | 998,227 |   |
| Machinery and  equipment                 |       | 197,689                  |       | 191,050                     |       |
| Fixtures,  fittings and office equipment |       | 189,016                  |       | 186,075                     |       |
| River cruiseship  and canalboats         |       | 19,188                   |       | 19,184                      |       |
|                                     |       | 1,422,524                |       | 1,394,536                   |       |
| Less:  accumulated depreciation          |       | (218,167                 | )          | (211,136                    | )          |
|                                     |       | $                        | 1,204,357  |                        | $          | 1,183,400 |   |

 

The major classes of assets under capital leasesincluded above are as follows (dollars in thousands):
| ** **                               | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                               |       |                     |       |                        |       |
| Freehold and  leased land and buildings  |       | $                        | 16,084     |                        | $          | 16,006 |   |
| Machinery and  equipment                 |       | 2,560                    |       | 2,205                       |       |
| Fixtures,  fittings and office equipment |       | 1,350                    |       | 1,678                       |       |
|                                     |       | 19,994                   |       | 19,889                      |       |
| Less:  accumulated depreciation          |       | (2,333                   | )          | (2,241                      | )          |
|                                     |       | $                        | 17,661     |                        | $          | 17,648 |   |

 

**5.             Goodwill**

OEH’s goodwillconsists of $1,383,000 related to the trains and cruises reporting segment and$120,760,000 related to the hotels and restaurants reporting segment.

**6.             Other intangible assets**

Other intangibleassets consist of the value of the Grand Hotel Europe tradename of $7,100,000,the purchase price allocation of $260,000 for the Casa de Sierra Nevadatradename, and the favorable lease intangible assets acquired as part of theacquisition of the Pansea hotels group of $13,030,000. Amortization expenserelating to a favorable Pansea lease was approximately $92,000 for the threemonths to March 31, 2007 (2006 - $nil).

10

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**7.             Long-term debt and obligations under capital lease**

Long-term debtconsists of the following (dollars in thousands):
| ** **                                                                                                                                                                                                 | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                                                                                                                                                                                       |       |                     |       |                        |       |
| Loans from banks  collateralized by property, plant and equipment payable over periods of 1 to  8 years, with a weighted average interest rate of 5.71% and 5.80%,  respectively, primarily based on LIBOR |       | $                        | 648,549    |                        | $          | 649,513 |   |
| Loan secured by  river cruiseship, payable over 3 years, with a weighted interest rate of  5.48% and 5.65% respectively, based on LIBOR                                                                    |       | 3,000                    |       | 3,500                       |       |
| Obligations  under capital lease                                                                                                                                                                           |       | 16,340                   |       | 16,684                      |       |
|                                                                                                                                                                                                       |       | 667,889                  |       | 669,697                     |       |
| Less: current  portion                                                                                                                                                                                     |       | 82,028                   |       | 83,397                      |       |
|                                                                                                                                                                                                       |       | $                        | 585,861    |                        | $          | 586,300 |   |

 

The carrying value of thedebt is equal to its fair value.

Certain credit agreementsof OEH have restrictive covenants. At March 31, 2007, OEH was in compliancewith these covenants, including a minimum consolidated net worth test and aminimum consolidated interest coverage test as defined under a bank-syndicated$241,000,000 loan facility. OEH does not currently have any covenants in itsloan agreements which limit the payment of dividends.

The following is asummary of the aggregate maturities of long-term debt, including obligationsunder capital lease, at March 31, 2007 (dollars in thousands):
| **Year ending December 31,** | ** ** | ** ** |
|------------------------------|------------|------------|
|                         |       |       |
| 2008                         |       | $          | 72,244 |
| 2009                         |       | 27,090     |
| 2010                         |       | 47,109     |
| 2011                         |       | 362,962    |
| 2012 and  thereafter         |       | 76,456     |
|                         |       | $          | 585,861 |

 

11

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**8.             Otherliabilities**

Other liabilities consist of $2,330,000 of deferredconsideration arising on the Casa de Sierra Nevada acquisition.

**9.             Incometaxes**

TheCompany is incorporated in Bermuda, which does not impose an income tax. OEH’seffective tax rate is entirely due to the income taxes imposed by jurisdictionsin which OEH conducts business other than Bermuda.

OEHrecorded a tax benefit for the three months ended March 31, 2007 of $2,728,000,compared to a benefit of $2,174,000 for the corresponding period in 2006. OEH’scurrent tax cost for the three months ended March 31, 2007 is $2,479,000,compared to a cost of $2,270,000 in 2006.

TheCompany adopted the provisions of FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes” (FIN 48) on January 1, 2007, and recognized a $28,820,000provision in respect of its uncertain tax positions which was accounted for asa decrease to the January 1, 2007 retained earnings. OEH recognizes accruedinterest and penalties related to uncertain tax positions in income taxexpense. The opening FIN 48 provision included an amount of $1,828,000 inrespect of potential interest liabilities and a further $9,947,000 of potentialfines and penalties.

OEH’stax benefit of $2,728,000 for the three months ended March 31, 2007 includes atax charge of $232,000 in respect of the FIN 48 provision, including a chargeof $116,000 that relates to the potential interest and penalties costsassociated with the uncertain tax positions.

AtMarch 31, 2007, OEH recognized a $29,301,000 provision in respect of its uncertaintax positions. OEH believes that it is reasonably possible that within the next12 months the FIN 48 provision will decrease by between $6,000,000 to$8,000,000 as a result of the resolution of tax positions in certainjurisdictions in which OEH operates.

Earnings fromunconsolidated subsidiaries are reported net of tax in the statements ofcondensed consolidated operations. The tax provision applicable to theseunconsolidated subsidiaries in the three months ended March 31, 2007 is$1,186,000, compared to a provision of $414,000 in the corresponding period in2006.

12

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**10.          Pensions**

Components of netperiodic pension benefit cost were as follows (dollars in thousands):
| **Three months ended March 31,** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                 |       |     |       |     |       |
| Service cost                                         |       | $        | —     |     | $          | 263 |   |
| Interest cost                                        |       | 284      |       | 213      |       |
| Expected return  on plan assets                      |       | (262     | )          | (198     | )          |
| Amortization of  net loss                            |       | 137      |       | 115      |       |
| Net periodic benefit  cost                           |       | $        | 159        |     | $          | 393 |   |

 

As reported in Note 10 tothe financial statements in the Company’s 2006 Form 10-K annual report, OEH expectedto contribute $940,000 to its defined benefit pension plan in 2007. As of March31, 2007, $144,000 of contributions had been made. OEH anticipates contributingan additional $796,000 to fund its pension plans in 2007 for a total of$940,000.

**11.          Supplemental cash flow information**

(Dollars inthousands):
| **Three months ended March 31,** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                 |       |     |       |     |       |
| Cash paid for:                                       |       |     |       |     |       |
| Interest                                             |       | $        | 10,695     |     | $          | 10,111 |   |
| Income taxes                                         |       | $        | 2,479      |     | $          | 1,319 |   |

 

In conjunction withacquisitions (see Note 2) liabilities were assumed as follows (dollars inthousands):
| **Three months ended March 31,** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                 |       |     |       |     |       |
| Fair value of  assets acquired                       |       | $        | 459        |     | $          | 15,233 |   |
| Cash paid                                            |       | (376     | )          | (14,070  | )          |
| Liabilities assumed                                  |       | $        | 83         |     | $          | 1,163 |   |

 

13

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**12.          Accumulated other comprehensive loss**

The accumulated balancesfor each component of other comprehensive loss are as follows (dollars inthousands):
| ** **                                        | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|  Foreign currency translation adjustments    |       | $                        | 3,604      |                        | $          | 3,545 |   |
| Derivative  financial instruments                 |       | 493                      |       | —                      |       |
| Additional  minimum pension liability, net of tax |       | (8,518                   | )          | (8,518                      | )          |
|                                              |       | $                        | (4,421     | )                           | $          | (4,973 | ) |

 

The components ofcomprehensive loss are as follows (dollars in thousands):
| **Three months ended March 31,** | ** ** | **2007** | ** ** | **2006  (restated)** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------------------|------------|
|                                                 |       |     |       |                 |       |
| Net losses on  common shares                         |       | $        | (3,681     | )                    | $          | (7,401 | ) |
| Foreign currency  translation adjustments            |       | 59       |       | 1,071                |       |
| Change in fair  value of derivatives                 |       | 493      |       | 35                   |       |
| Comprehensive loss                                   |       | $        | (3,129     | )                    | $          | (6,295 | ) |

 

**13.          Commitments**

Outstanding contracts topurchase fixed assets were approximately $48,868,000 at March 31, 2007(December 31, 2006 -$21,839,000).

**14.          Information concerning financial reporting for segments and operationsin different geographical areas**

As reported in theCompany’s 2006 Form 10-K annual report, OEH has three reporting segments, (i)hotels and restaurants, (ii) tourist trains and cruises, and (iii) real estateand property development. Segment performance is evaluated based upon segmentnet earnings before interest, tax (including tax on earnings fromunconsolidated companies), depreciation and amortization (“segment EBITDA”). Financialinformation regarding these business segments is as follows, with net financecosts appearing net of capitalized interest and interest and related income(dollars in thousands):

14

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| **Three months ended March 31,**             | ** **                  | **2007** | ** ** | **2006  (restated)** | ** ** |
|------------------------------------------------------------------|-----------------------------|----------|------------|----------------------|------------|
| Revenue:                                                         |                        |     |       |                 |       |
| Hotels and  restaurants                                          |                        |     |       |                 |       |
| Owned hotels                                                     | –  Europe         |     | $          | 21,115               |       | $ | 12,385 |   |
|                                                             | –  North  America |     | 23,138     |                 | 20,709     |   |
|                                                             | –  Rest of  world |     | 34,645     |                 | 29,828     |   |
| Hotel management/part ownership interests                        |                        | 2,374    |       | 1,985                |       |
| Restaurants                                                      |                        | 5,295    |       | 5,319                |       |
|                                                             |                        | 86,567   |       | 70,226               |       |
| Tourist trains  and cruises                                      |                        | 9,359    |       | 6,829                |       |
| Real estate                                                      |                        | —   |       | 2,196                |       |
|                                                             |                        | $        | 95,926     |                 | $          | 79,251 |   |
|                                                             |                        |     |       |                 |       |
| Depreciation and  amortization:                                  |                        |     |       |                 |       |
| Hotels and  restaurants                                          |                        |     |       |                 |       |
| Owned hotels                                                     | –  Europe         |     | $          | 3,719                |       | $ | 3,530 |   |
|                                                             | –  North  America |     | 1,743      |                 | 1,772      |   |
|                                                             | –  Rest of  world |     | 2,562      |                 | 2,184      |   |
| Restaurants                                                      |                        | 229      |       | 223                  |       |
|                                                             |                        | 8,253    |       | 7,709                |       |
| Tourist trains  and cruises                                      |                        | 815      |       | 897                  |       |
|                                                             |                        | $        | 9,068      |                 | $          | 8,606 |   |
|                                                             |                        |     |       |                 |       |
| Segment EBITDA:                                                  |                        |     |       |                 |       |
| Owned hotels                                                     | –  Europe         |     | $          | (3,555               | )          | $ | (7,167 | ) |
|                                                             | –  North  America |     | 6,120      |                 | 5,302      |   |
|                                                             | –  Rest of  world |     | 11,215     |                 | 9,577      |   |
| Hotel management/part ownership interests                        |                        | 4,647    |       | 3,370                |       |
| Restaurants                                                      |                        | 868      |       | 1,098                |       |
| Tourist trains and cruises                                       |                        | 1,148    |       | 166                  |       |
| Real estate                                                      |                        | (458     | )          | 719                  |       |
| Central overheads                                                |                        | (5,681   | )          | (4,532               | )          |
|                                                             |                        | $        | 14,304     |                 | $          | 8,533 |   |
|                                                             |                        |     |       |                 |       |
| Segment  EBITDA/net losses reconciliation:                       |                        |     |       |                 |       |
| Segment EBITDA                                                   |                        | $        | 14,304     |                 | $          | 8,533 |   |
| Less:                                                            |                        |     |       |                 |       |
| Depreciation and amortization                                    |                        | 9,068    |       | 8,606                |       |
| Interest expense, net                                            |                        | 10,561   |       | 9,770                |       |
| Foreign currency, net                                            |                        | (102     | )          | (682                 | )          |
| Benefit from income taxes                                        |                        | (2,728   | )          | (2,174               | )          |
| Share of provision for income taxes of  unconsolidated companies |                        | 1,186    |       | 414                  |       |
| Net losses                                                       |                        | $        | (3,681     | )                    | $          | (7,401 | ) |
|                                                             |                        |     |       |                 |       |
| Earnings from  unconsolidated companies, net of tax:             |                        |     |       |                 |       |
| Hotels and restaurants                                           |                        |     |       |                 |       |
| Hotel management/part ownership interests                        |                        | $        | 1,500      |                 | $          | 971 |   |
| Restaurants                                                      |                        | —   |       | 69                   |       |
|                                                             |                        | 1,500    |       | 1,040                |       |
| Tourist trains and cruises                                       |                        | 803      |       | 786                  |       |
|                                                             |                        | $        | 2,303      |                 | $          | 1,826 |   |

 

15

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| **Three months ended March 31,** | ** **                  | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------|-----------------------------|----------|------------|----------|------------|
|                                                 |                        |     |       |     |       |
| Capital  expenditure:                                |                        |     |       |     |       |
| Owned hotels                                         | –  Europe         |     | $          | 10,815   |       | $ | 13,561 |   |
|                                                 | –  North  America |     | 9,133      |     | 2,968      |   |
|                                                 | –  Rest of  world |     | 4,049      |     | 2,802      |   |
| Hotel management/part ownership interests            |                        | —   |       | —   |       |
| Restaurants                                          |                        | 152      |       | 62       |       |
| Tourist trains and cruises                           |                        | 1,011    |       | 1,915    |       |
| Real estate                                          |                        | 1,993    |       | —   |       |
|                                                 |                        | $        | 27,153     |     | $          | 21,308 |   |

 

Financialinformation regarding geographic areas based on the location of properties isas follows (dollars in thousands):
| **Three months ended March 31,** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                 |       |     |       |     |       |
| Revenue:                                             |       |     |       |     |       |
| Europe                                               |       | $        | 27,838     |     | $          | 17,154 |   |
| North America                                        |       | 29,388   |       | 28,751   |       |
| Rest of world                                        |       | 38,700   |       | 33,346   |       |
|                                                 |       | $        | 95,926     |     | $          | 79,251 |   |

 

**15.          Derivative financial instruments**

OEH is exposed tointerest rate risk on its floating rate debt, and in September 2006 it enteredinto interest rate swap agreements for the notional amounts of €75,000,000($95,000,000) and €24,700,000 ($31,000,000) that limit the exposure to a fixedrate level. Although the interest rate swap for €24,700,000 economically hedgesthe interest rate risk, it has not qualified as a cash flow hedge and,therefore, changes in the fair value of this swap were recorded to interestexpense in earnings. The interest rate swap for €75,000,000 has been designatedand has qualified as a cash flow hedge of the floating rate debt effectiveDecember 31, 2006. This swap is expected to be and has been highly effectiveand, therefore, only $49,000 ineffectiveness gain has been recognized inearnings with the rest of the movement in the fair value being recorded incomprehensive loss.

Of the existing gains atMarch 31, 2007, approximately $48,000 will be reclassified into earnings duringthe next 12 months, assuming no further changes in fair value of the contract.

At March 31, 2007 andDecember 31, 2006, the fair values of the outstanding interest rate swaps wereaccounted for as other non-current assets at $1,447,000 and $687,000,respectively.

16

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**16.   Relatedparty transactions**

OEH guarantees a$3,000,000 bank loan to Eastern and Oriental Express Ltd. in which OEH has aminority shareholder interest.  Thisguarantee was in place before December 31, 2002.

OEH manages under along-term contract the Charleston Place Hotel (accounted for under the equitymethod) and has made loans to the hotel-owning company.  For the three months ended March 31, 2007,OEH earned $1,351,000 (2006 - $1,074,000) in management fees which are recordedin revenue, and $2,794,000 (2006 - $2,342,000) in interest income onpartnership and other loans, which are recorded in earnings from unconsolidatedcompanies.

OEHmanages under long-term contracts the Hotel Monasterio and the Machu PicchuSanctuary Lodge owned by its 50/50 joint venture with local Peruvian interests,as well as the 50/50-owned PeruRail operation, and provides loans, guaranteesand other credit accommodation to these joint ventures.  In the three months ended March 31, 2007, OEHearned management and guarantee fees of $1,329,000 (2006 - $1,065,000) and loaninterest of $16,000 (2006 - $32,000) which are recorded in revenue.   At March 31, 2007, OEH had a $750,000subordinated loan to the PeruRail operation with an indefinite maturity dateand interest also at a spread over LIBOR. All of the guarantees relating to the Company’s investments in Peru werein place prior to December 31, 2002.

OEHmanages under a long-term contract the Hotel Ritz in Madrid, Spain, in whichOEH owns a 50% interest and is accounted for under the equity method.  For the three months ended March 31, 2007,OEH earned $233,000 (2006 - $246,000) in management fees, which are included inrevenue.

OEHhas granted to James Sherwood, Chairman and a director of the Company, a rightof first refusal to purchase the Hotel Cipriani in Venice, Italy in the eventOEH proposes to sell it.  The purchaseprice would be the offered sale price in the case of a cash sale or the fairmarket value of the hotel, as determined by an independent valuer, in the caseof a non-cash sale.  Mr. Sherwood hasalso been granted an option to purchase the hotel at fair market value if achange in control of the Company occurs.

**17.   ****Subsequent events**

OnApril 12, 2007, OEH acquired the remaining 50% of Luxury Waterway Cruises(Afloat in France) for a cash consideration of $2,700,000, and on April 25,2007, OEH acquired the remaining 50% of GSWR Holdings Limited (Royal Scotsman)for a cash consideration of £1,375,000 ($2,680,000) plus assumption of thedebts in the amount of approximately £1,000,000 ($1,950,000).

17

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# **ITEM 2.      Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

**Restatement of prior quarter’sfinancial statements**

As disclosed inthe 2006 Form 10-K, OEH has restated its condensed consolidated quarterlyfinancial statements.  As more fullydiscussed in Note 1 to the financial statements in this report, OEH restatedits statements of condensed consolidated operations and its statements of condensedconsolidated cash flows for the three month period ended March 31, 2006.  The restatement corrects for errors made inthe application of U.S. generally accepted accounting principles for deferredtax accounting and a reclassification of financing costs.  All comparisons in this Item 2 reflectrestatements of OEH’s quarterly financial results for 2006.

**Resultsof Operations**

OEH’s operating resultsfor the three months ended March 31, 2007 and 2006, expressed as a percentageof revenue, were as follows:
| ** **                                   | ** ** | **Three months  ended March 31** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                   | ** ** | **2007**                                        | ** ** | **2006** | ** ** |
| ** **                                   | ** ** | **%**                                           | ** ** | **%** | ** ** |
| Revenue:                                     |       |                                            |       |   |   |
| Hotels and restaurants                       |       | 90                                              |       | 91 |   |
| Tourist trains and cruises                   |       | 10                                              |       | 9 |   |
| Real estate                                  |       | 0                                               |       | 0 |   |
|                                         |       | 100                                             |       | 100 |   |
| Expenses:                                    |       |                                            |       |   |   |
| Depreciation and amortization                |       | 10                                              |       | 11 |   |
| Operating                                    |       | 51                                              |       | 51 |   |
| Selling, general and administrative          |       | 37                                              |       | 41 |   |
| Net finance  costs                           |       | 11                                              |       | 11 |   |
| Losses before  income taxes                  |       | (9                                              | )          | (14 | ) |
| Benefit from  income taxes                   |       | 3                                               |       | 3 |   |
| Earnings from  unconsolidated companies      |       | 2                                               |       | 2 |   |
| Net losses as a  percentage of total revenue |       | (4                                              | )          | (9 | ) |

 

Segment netearnings before interest, tax (including tax on unconsolidated companies),depreciation and amortization (“segment EBITDA”) of OEH’s operations for thethree months ended March 31, 2007 and 2006 are analyzed as follows (dollars inmillions):

18

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| ** **                  | ** ** | **Three months  ended March 31** | ** ** |
|-----------------------------|------------|-------------------------------------------------|------------|
| ** **                  | ** ** | **2007**                                        | ** ** | **2006** | ** ** |
| Segment EBITDA:             |       |                                            |       |   |   |
| Owned hotels:               |       |                                            |       |   |   |
| Europe                      |       | $                                               | (3.6       | ) | $ | (7.2 | ) |
| North America               |       | 6.1                                             |       | 5.3 |   |
| Rest of the world           |       | 11.2                                            |       | 9.5 |   |
| Hotel management  interests |       | 4.6                                             |       | 3.4 |   |
| Restaurants                 |       | 0.9                                             |       | 1.1 |   |
| Tourist trains  and cruises |       | 1.1                                             |       | 0.2 |   |
| Real estate                 |       | (0.4                                            | )          | 0.7 |   |
| Central  overheads          |       | (5.6                                            | )          | (4.5 | ) |
| Total segment EBITDA        |       | $                                               | 14.3       |   | $ | 8.5 |   |

 

The foregoing segmentEBITDA reconciles to net losses as follows (dollars in millions):
| ** **                                                       | ** ** | **Three months ended  March 31** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                       | ** ** | **2007**                                        | ** ** | **2006** | ** ** |
| Net losses                                                       |       | $                                               | (3.7       | ) | $ | (7.4 | ) |
| Add:  Depreciation and amortization                              |       | 9.1                                             |       | 8.6 |   |
| Net finance  costs                                               |       | 10.5                                            |       | 9.1 |   |
| Benefit from  income taxes                                       |       | (2.7                                            | )          | (2.2 | ) |
| Share of  provision for income taxes of unconsolidated companies |       | 1.1                                             |       | 0.4 |   |
| Segment EBITDA                                                   |       | $                                               | 14.3       |   | $ | 8.5 |   |

 

Management evaluates theoperating performance of OEH’s segments on the basis of segment EBITDA andbelieves that segment EBITDA is a useful measure of operating performancebecause segment EBITDA is not affected by non-operating factors such asleverage and the historic cost of assets. EBITDA is a financial measure commonly used in OEH’s industry.  OEH’s segment EBITDA, however, may not becomparable in all instances to EBITDA as disclosed by other companies.  Segment EBITDA should not be considered as analternative to earnings from operations or net earnings (as determined inaccordance with U.S. generally accepted accounting principles) as a measure ofOEH’s operating performance, or as an alternative to net cash provided byoperating, investing and financing activities (as determined in accordance withU.S. generally accepted accounting principles) as a measure of OEH’s ability tomeet cash needs.

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Operatinginformation for OEH’s owned hotels for the three months ended March 31, 2007and 2006 is as follows:
|                                  | ** ** | **Three months  ended March 31** | ** ** |
|----------------------------------|------------|-------------------------------------------------|------------|
| ** **                       | ** ** | **2007**                                        | ** ** | **2006** | ** ** |
| ** **                       | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Average Daily  Rate (in dollars) |       |                                            |       |   |   |
| Europe                           |       | 398                                             |       | 314 |   |
| North America                    |       | 438                                             |       | 347 |   |
| Rest of the world                |       | 284                                             |       | 310 |   |
| Worldwide                        |       | 346                                             |       | 323 |   |
|                             |       |                                            |       |   |   |
| Rooms Available  (in thousands)  |       |                                            |       |   |   |
| Europe                           |       | 63                                              |       | 47 |   |
| North America                    |       | 55                                              |       | 49 |   |
| Rest of the world                |       | 110                                             |       | 86 |   |
| Worldwide                        |       | 228                                             |       | 182 |   |
|                             |       |                                            |       |   |   |
| Rooms Sold (in  thousands)       |       |                                            |       |   |   |
| Europe                           |       | 26                                              |       | 16 |   |
| North America                    |       | 36                                              |       | 38 |   |
| Rest of the world                |       | 74                                              |       | 58 |   |
| Worldwide                        |       | 136                                             |       | 112 |   |
|                             |       |                                            |       |   |   |
| RevPAR (in  dollars)             |       |                                            |       |   |   |
| Europe                           |       | 157                                             |       | 108 |   |
| North America                    |       | 280                                             |       | 266 |   |
| Rest of the world                |       | 189                                             |       | 210 |   |
| Worldwide                        |       | 202                                             |       | 199 |   |

 
|                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Change %** | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|-------------------|------------|
| ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | **Dollars**       | ** ** | **Local  Currency** | ** ** |
| Same Store RevPAR (in dollars) |       |       |       |       |       |              |       |   |   |
| Europe                                             |       | 108        |       | 103        |       | 4                 | %          | 0 | % |
| North America                                      |       | 395        |       | 369        |       | 7                 | %          | 7 | % |
| Rest of the world                                  |       | 207        |       | 210        |       | -1                | %          | 7 | % |
| Worldwide                                          |       | 229        |       | 227        |       | 1                 | %          | 7 | % |

 

Average daily rate is theaverage amount achieved for the rooms sold. RevPAR is revenue per available room, that is the rooms revenue dividedby the number of available rooms for each night of operation.  Same store RevPAR is a comparison based onthe operations of the same units in each period, such as by excluding theeffect of any acquisitions or major refurbishments.

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Three Months Ended March31, 2007 Compared To Three Months Ended March 31, 2006

*Overview*

The net loss for theperiod was $3.7 million ($0.09 per common share) on revenue of $95.9 million,compared with a net loss of $7.4 million ($0.19 per common share) on revenue of$79.3 million in the prior year first quarter. The first quarter is a traditional loss-making period because a numberof OEH’s properties are closed for the winter, the VeniceSimplon-Orient-Express train does not operate and tourist arrivals are low inlocations with poor winter weather.

*Revenue*

Total revenue increasedby $16.6 million, or 21%, from $79.3 million in the three months ended March31, 2007 to $95.9 million in the three months ended March 31, 2006.  Hotels and restaurants revenue increased by$16.4 million, or 23%, from $70.2 million in the three months ended March 31,2006 to $86.6 million in the three months ended March 31, 2007, and touristtrains and cruises increased by $2.6 million, or 38%, from $6.8 million for thethree months ended March 31, 2006 to $9.4 million for the three months endedMarch 31, 2007.  There were no realestate revenues for the three months ended March 31, 2007, compared with $2.2million for the three months ended March 31, 2006.

The increase in totalrevenue was due primarily to the addition of the Asian hotels portfolio, whichreported revenues of $4.2 million, and to trains and cruises.  All elements of the trains and cruisesportfolio showed growth.  This, coupledwith revenues for Reids Palace Hotel, Madeira (closed in the three months endedMarch 31, 2006) saw revenues 21% ahead of the three months ended March 31,2006.

The revenue fromrestaurants was flat at $5.3 million in the three months ended March 31, 2007with growth at the ‘21’ Club in New York offset by the impact of the sale ofHarry’s Bar in June 2006.

For owned hotels overall,same store RevPAR in U.S. dollars increased by 1% in the three months endedMarch 31, 2007 compared to the three months ended March 31, 2006.  Measured in local currencies this increasewas 7%, due to higher achieved daily rate.

The change in revenue atowned hotels is analyzed on a regional basis as follows:

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*Europe*.  Revenue increased by $8.7 million, or 70%,from $12.4 million for the three months ended March 31, 2006 to $21.1 millionfor the three months ended March 31, 2007. Revenue at Reids Palace Hotel, Madeira, which was closed in the threemonths ended 2006 grew by $4.1 million. The Grand Hotel Europe revenues grew by $1.2 million to $6.2 million,driven by average rate improvements, and revenues at Le Manoir aux Quat’Saisonsgrew by $1.1 million to $4.5 million, the growth underpinned by food andbeverage growth.

On a same store basis,excluding the above, RevPAR in local currency was flat, but in U.S. dollarsthis translated into an increase of 4%.

*North America*.  Revenue increased by $2.4 million, or 12%,from $20.7 million in the three months ended March 31, 2006 to $23.1 million inthe three months ended March 31, 2007.

On a same store basis,RevPAR increased by 7% which was driven entirely by rate.

*Rest of the World*.  Revenue increased by $4.8 million, or 16%,from $29.8 million in the three months ended March 31, 2006 to $34.6 million inthe three months ended March 31, 2007. The impact of the acquisition of the Asian hotels (former Pansea group)saw revenues increased by $4.2 million. Southern Africa revenues were flat at $10.6 million in the three monthsended March 31, 2007.  South Americarevenues increased by $0.6 million, or 5%, from $12.0 million in the threemonths ended March 31, 2006 to $12.6 million in the three months ended March31, 2007.

The RevPAR on a samestore basis for the Rest of the World region increased by 7% in localcurrencies in the three months ended March 31, 2007 compared to the threemonths ended March 31, 2005. Approximately 1% of this increase was due to increased occupancies atthe hotels with 6% due to a higher achieved average daily rate.  This RevPAR increase in local currenciestranslated to a 1% decrease when expressed in U.S. dollars.

*Hotel Management andPart-Ownership Interests. *Revenueincreased by $0.4 million, or 20%, from $2.0 million in the three months endedMarch 31, 2006 to $2.4 million in the three months ended March 31, 2007, due toincreased revenues at Charleston Place and the hotels in Peru.

*Trains and Cruises. *Revenue increased by $2.6million, or 38%, from $6.8 million in the three months ended March 31, 2006 to$9.4 million in the three months ended March 31, 2007, due

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primarily to theperformance of Venice Simplon-Orient-Express.

*Real Estate: *Revenue decreased by $2.2million from $2.2 million in the three months ended 31 March 2006 to $0.0million in the three months to March 31, 2007, due to no sales being recordedat Keswick Hall in that period.

*Depreciation and amortization*

Depreciation andamortization increased by $0.5 million, or 6%, from $8.6 million in the threemonths ended March 31, 2006 to $9.1 million in the three months ended March 31,2007, primarily due to the effect of acquisitions of the Asian hotels (formerlyPansea group) and capital expenditures during 2006, including the refurbishmentof the Copacabana Palace Hotel and Reids Palace Hotel, Madeira.

*Operating expenses*

Operating expensesincreased by $8.7 million, or 21%, from $40.7 million in the three months endedMarch 31, 2006 to $49.4 million in the three months ended March 31, 2007.  The increase was in line with revenueincreases, with operating expenses remaining at 51% of revenue for the threemonths ended March 31, 2007, the same level as for the three months ended March31, 2006.

*Selling, general andadministrative expenses*

Selling, general andadministrative expenses increased by $3.5 million, or 11%, from $32.2 millionin the three months ended March 31, 2006 to $35.7 million in the three monthsended March 31, 2007.  This increase wasdue to revenue increases driven by acquisitions.  As a percentage of revenue, selling, generaland administrative expenses decreased by 4% to 37% in the three months endedMarch 31, 2007.

*Margins*

Segment EBITDA margins(calculated as segment EBITDA as a percentage of revenue) for the three monthsended March 31, 2007 for OEH increased by 4%, from 10% for the three monthsended March 31, 2006.  The increase wasprimarily due to the performance of the Rest of World properties, whichincreased margins from 32% in the three months to March 31, 2006 to 46% in thethree months March 31, 2007.  Margins inEurope increased from negative 58% in the three months March 31, 2006 to negative17% for the three months March 31, 2007. Margins in the United States were flat at 26%.

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*Earnings (losses) from operationsbefore net finance costs*

Earnings from operationsincreased by $4.0 million from losses of $2.3 million in the three months endedMarch 31, 2006 to a profit of $1.7 million in the three months ended March 31,2007, due to the factors described in the Overview above.

*Net finance costs*

Net finance costsincreased by $1.4 million, or 15%, from $9.1 million for the three months endedMarch 31, 2006 to $10.5 million for the three months ended March 31, 2007.  The three months ended March 31, 2006included a foreign exchange gain of $0.6 million compared to $0.1 million inthe three months ended March 31, 2007. Excluding this gain, net finance costs increased by $0.8 million, or 8%,from $9.8 million for the three months ended March 31, 2006 to $10.6 millionfor the three months ended March 31, 2007, due to the impact of financing ofnew investments and increases in U.S. interest rates.

*Benefit from income taxes*

The benefit from income taxes increased by $0.5 million, from a benefitof $2.2 million in the three months ended March 31, 2006 to a benefit of $2.7million in the three months ended March 31, 2007.

The Company recognized a provision of $28.8 million in respect of itsuncertain tax positions upon the adoption of FASB interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (FIN 48) on January 1, 2007. The benefit fromincome taxes of $2.7 million for the three months ended March 31, 2007 includeda tax provision of $0.2 million in respect of the FIN 48 liability.

*Earnings from unconsolidatedcompanies*

Earnings fromunconsolidated companies increased by $0.5 million, or 28%, from $1.8 millionin the three months ended March 31, 2006 to $2.3 million in the three monthsended March 31, 2007.  This was mainlydue to increased earnings from OEH’s investments in Peru and Charleston.

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**Liquidity and Capital Resources**

*Working Capital*

OEH had cash and cashequivalents of $59.5 million at March 31, 2007, $19.8 million less than the$79.3 million at December 31, 2006.  AtMarch 31, 2007, there were undrawn amounts available to OEH under committedshort-term lines of credit of $24.0 million and undrawn amounts available toOEH under secured revolving credit facilities of $94.8 million, bringing totalcash availability at March 31, 2007 to $178.3 million.

Current assets lesscurrent liabilities, including the current portion of long-term debt, resultedin a working capital deficit of $14.0 million at March 31, 2007, a decrease inthe working capital of $29.8 million from a balance of $15.8 million surplus atDecember 31, 2006.  Changes in thefollowing balances made the most contribution to the decrease in the workingcapital:

·                  Cash and cashequivalents have decreased by $19.8 million due to various activities describedunder “Cash Flow” below;

·                  Working capitalfacilities borrowings have increased by $20.0 million;

·                  Deferred revenuehas increased by $10.7 million due to a higher volume of orders for thefollowing quarter.

These have been offset byincreases in prepaid expenses of $6.4 million, inventory of $3.2 million, realestate assets of $3.9 million and other working capital movements due to thehigher activities in the hotel and real estate business anticipated later inthe year.

OEH’s business does notrequire the maintenance of significant inventories or receivables and,therefore, working capital is not regarded as the most appropriate measure ofliquidity.

*Cash Flow*

*Operating Activities*.  Net cash used in operating activitiesincreased by $1.3 million from $1.3 million for the three months ended March31, 2006 to $2.6 million for the three months ended March 31, 2007.  This was due to various movements in theworking capital balances.

*Investing Activities*.  Cash used in investing activities increasedby $0.4 million to $31.2 million for the three months

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ended March 31, 2007,compared to $30.8 million for the three months ended March 31, 2006.

The higher capitalexpenditure (increase of $5.8 million) was offset by lower acquisitions and byproceeds from sale of fixed assets (a total cash inflow of $5.4 million).  Capital expenditure of $27.2 million included$3.9 million for refurbishment of the Grand Hotel Europe, $2.3 million El Encantoconstruction costs, $2.1 million Casa de Sierra Nevada refurbishments, $2.0million construction of assets at Cupecoy Village in St. Martin, $4.5 millioncapital expenditure at the Italian hotels and $1.9 million of Asian hotelscapital costs.

Current quarteracquisitions of $4.7 million included the acquisition of 18% of the Laos hotelinterest and repayment of final cash from the escrow account relating to theGrand Hotel Europe acquisition.  The 2006first quarter acquisitions included 75% of Casa de Sierra Nevada and 25% ofMaroma interests.

*Financing Activities*.  Cash provided by financing activities for thethree months ended March 31, 2007 was $13.9 million compared to $32.8 millionfor the three months ended March 31, 2006, a decrease of $18.9 million.  In the three months ended March 31, 2007, OEHhad proceeds from borrowings under long-term debt of $0.1 million, compared toproceeds of $42.3 million for the three months ended March 31, 2006 which included$41.3 million of the Italian hotels facility drawdown.  Proceeds from working capital borrowings haveincreased by $10.9 million and cash used in long-term debt repayments hasdecreased by $10.9 million due to the changes in repayment terms following therefinancing projects completed in 2006.

*Capital Commitments*.  There were $48.9 million of capitalcommitments outstanding as of March 31, 2007 mainly on investments in ownedhotels.

*Indebtedness*

At March 31, 2007, OEHhad $667.9 million of long-term debt secured by assets ($608.4 million net ofcash), including the current portion, which is repayable over periods of 1 to 8years with a weighted average interest rate of 5.71%.  See Note 7 to the financial statementsregarding the maturity of long-term debt.

Approximately 48% of theoutstanding principal was drawn in European euros and the balance primarily inU.S. dollars.  At March 31, 2007, 77% ofborrowings of OEH were in floating interest rates.

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*Liquidity*

OEH expects to haveavailable cash from operations and appropriate debt finance sufficient to fundits working capital requirements, capital expenditures, acquisitions and debtservice for the foreseeable future.

**Recent Accounting Pronouncements**

As of March 31, 2007, theCompany’s significant accounting policies and estimates, which are described inNote 1 to the financial statements in the Company’s 2006 Form 10-K annualreport, have not changed from December 31, 2006, except for the adoption of FIN48 on January 1, 2007 as described in Note 9.

*SFAS 159*

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities – Including an Amendment of FASB Statement No. 115” (“SFAS159”).  This standard permits an entityto choose to measure many financial instruments and certain other items at fairvalue.  Most of the provisions in SFAS159 are elective; however, the amendment to SFAS No. 115, “Accounting forCertain Investments in Debt and Equity Securities”, applies to all entitieswith available-for-sale and trading securities. The fair value optionestablished by SFAS 159 permits all entities to choose to measure eligibleitems at fair value at specified election dates.  A business entity will report unrealizedgains and losses on items for which the fair value option has been elected inearnings (or another performance indicator if the business entity does notreport earnings) at each subsequent reporting date.  The fair value option (a) may be appliedinstrument by instrument, with a few exceptions, such as investments otherwiseaccounted for by the equity method, (b) is irrevocable (unless a new electiondate occurs) and (c) is applied only to entire instruments and not to portionsof instruments.  SFAS 159 is effective asof the beginning of an entity’s first fiscal year that begins after November15, 2007.  The adoption of SFAS 159 isnot expected to have any impact on OEH’s consolidated financial statements.

## **CriticalAccounting Policies**

For a discussion ofthese, see under the heading “Critical Accounting Policies” in Item 7 –Management’s Discussion and Analysis in the Company’s 2006 Form 10-K annualreport.

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**ITEM 3.      Quantitativeand Qualitative Disclosures about Market Risk**

OEH is exposed to marketrisk from changes in interest rates and foreign currency exchange rates.  These exposures are monitored and managed aspart of OEH’s overall risk management program, which recognizes theunpredictability of financial markets and seeks to mitigate material adverseeffects on consolidated earnings and cash flows.  OEH does not hold market rate sensitivefinancial instruments for trading purposes.

The market risk relatingto interest rates arises mainly from the financing activities of OEH. Earningsare affected by changes in interest rates on borrowings, principally based onU.S. dollar LIBOR and EURIBOR, and on short-term cash investments.  If interest rates increased by 10%, with allother variables held constant, annual net finance costs of OEH would haveincreased by approximately $3,200,000 on an annual basis based on borrowings atMarch 31, 2007. The interest rates on substantially all of OEH’s long-term debtare adjusted regularly to reflect current market rates.  Accordingly, the carrying amounts approximatefair value.

The market risk relatingto foreign currencies and its effects have not changed materially during thefirst three months of 2007 from those described in the Company’s 2006 Form 10-Kannual report.

**ITEM 4.      Controlsand Procedures**

TheCompany’s chief executive and financial officers have evaluated theeffectiveness of the Company’s disclosure controls and procedures (as definedin SEC Rule 13a-15(e)) as of March 31, 2007 and, based on that evaluation,believe those disclosure controls and procedures are effective as of thatdate.  There have been no changes in theCompany’s internal control over financial reporting (as defined in SEC Rule13a-15(f)) during the first quarter of 2007 that have materially affected, orare reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

Itshould be noted that any system of controls, however well designed andoperated, can provide only reasonable, and not absolute, assurance that theobjectives of the system are met such as prevention and detection ofmis-statement.  In addition, the designof any control system is based in part upon certain assumptions about thelikelihood of future events.  Controlsmay become inadequate because of changes in conditions, or the degree ofcompliance with policies or procedures may deteriorate, for example.  Because of these and other inherentlimitations of control systems, there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions.

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**PART II - OTHERINFORMATION**

# **ITEM 6.      Exhibits**

The index to exhibitsappears below, on the page immediately following the signature page to thisreport.

**SIGNATURES**

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.
|        |   | ORIENT-EXPRESS HOTELS LTD. |
|--------|--------|----------------------------|
|   |   |                       |
|   |   |                       |
|        |   | By:                        | /s/ P. M. White |   |
|   |   |                       | Paul M. White |   |
|   |   |                       | Vice President - Finance |   |
|   |   |                       | and Chief Financial Officer |   |
|   |   |                       | (Principal Accounting Officer) |   |

 

Dated: May 10, 2007

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# **EXHIBITINDEX**

3.1           –              Memorandum of Association and Certificateof Incorporation of the Company, filed as Exhibit 3.1 to Amendment No. 2 to theCompany’s Registration Statement on Form S-1 (Registration No. 333-12030) andincorporated herein by reference.

3.2           –              Bye-Laws of the Company, filed as Exhibit3 to the Company’s Form 8-K Current Report on July 6, 2006 and incorporatedherein by reference.

3.3           –              Rights Agreement dated as of June 1,2000, and amended and restated as of April 12, 2007, between the Company andComputershare Trust Company, N.A., as rights agent, filed as Exhibit 1 toAmendment No. 1 to the Company’s Registration Statement on Form 8-A dated April23, 2007, for the Company’s preferred share purchase rights, and incorporatedherein by reference.

31            –              Rule 13a-14(a)/15d-14(a) Certifications.

32            –              Section 1350 Certification.

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